This section of FinAid discusses a loophole that allows students who
have bank-based federal student loans in the FFEL program to
consolidate those loans while they are still in school.
This loophole was
confirmed by the US Department of Education in Dear Partner Letter GEN-05-08.
The loophole has been repealed, effective July 1, 2006, by the
Higher Education Reconciliation Act of 2005 (HERA 2005).

Normally, only students in the Direct Loan program can consolidate
their loans using the Federal Direct Consolidation Loan Program while
they are still in school. Students in the FFEL
program must wait until after they graduate to consolidate their
loans. (All students can consolidate their loans during the grace
and repayment periods.) Direct Loan borrowers who consolidated during
the in-school period retained their grace periods. The ability of
Direct Loan borrowers to consolidate during the in-school period was
repealed by HERA 2005 effective July 1, 2006.

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However, it appears that students with FFELP loans can ask that their
loans be put into repayment status early. Once the loans are in
repayment status, they can be consolidated.

This loophole is based on section 428(b)(7) of the Higher Education
Act, which defines repayment period as follows:

REPAYMENT PERIOD. -- (A) In the case of a loan made
under section 427 or 428, the repayment period shall exclude
any period of authorized deferment or forbearance and shall
begin --

the day after 6 months after the date the student
ceases to carry at least one-half the normal full-time academic
workload (as determined by the institution); or

on an earlier date if the borrower requests and is
granted a repayment schedule that provides for repayment
to commence at an earlier date.

Similar language appears in the regulations at 34 CFR 682.209(a)(5):

For a Stafford loan, the repayment period begins prior to the
end of the grace period if the borrower requests in writing and
is granted a repayment schedule that so provides. In this event,
a borrower waives the remainder of the grace period.

Although this provision of the Higher Education Act was apparently
intended to allow students to enter repayment before the end of the
grace period, ending the grace period early, nothing in
the act or regulations prevents a student from entering repayment
before the beginning of the grace period (i.e., during the in-school
period).

If a student's loans are in repayment, regardless of whether the
student is still in school, they can be consolidated per section
428C(a)(3)(A) of the Higher Education Act:

DEFINITION OF ELIGIBLE BORROWER. -- (A) For the purpose of this
section, the term "eligible borrower" means a borrower who --

is not subject to a judgment secured through litigation
with respect to a loan under this title or to an order
for wage garnishment under section 488A; and

at the time of application for a consolidation loan --

is in repayment status;

is in a grace period preceding repayment; or

is a defaulted borrower who has made
arrangements to repay the obligation on the defaulted
loans satisfactory to the holders of the defaulted loans.

Since the student will be in repayment, the applicable interest rate
will be the repayment rate, not the in-school rate. Some lenders are
giving the loans an in-school deferment before consolidating them, in
order to let them lock in the lower in-school interest rate.

After the student has consolidated their loans, the consolidation loan
is given an in-school deferment, delaying the repayment obligation
until after the student graduates. The student loses the remainder of
the grace period. Some lenders, however, are giving the students a
financial benefit that is the equivalent of the lost grace period.

Ask the current holder of your loans to put them into early
repayment status. The loans then are eligible for consolidation, and
are at the repayment rate.

Ask the lender for an in-school deferment. This returns the loans
to the in-school rate and suspends the repayment obligation.

Consolidate the loans. This locks in the in-school rate, but loses
the remainder of the grace period. The in-school deferment is
retained, deferring the repayment obligation until the student graduates.

This loophole applies only to students in the bank-based (FFEL)
student loan program. Students in the Direct Loan program can directly
consolidate during the in-school period, and so do not need this
loophole.

Students who will be graduating soon should not use this
loophole. Instead, they should wait until they are in the grace period
to consolidate, in order to lock in the lower in-school interest
rate and maximize the use of their grace period.

Not every continuing student will be able to consolidate. For a
student to consolidate, there has to be a lender who is willing
to consolidate their loans. Most lenders will only consolidate
loans for students with loan balances of at least $7,500. A few
have minimum balances of $5,000, and the Federal Direct Consolidation
Loan Program has no minimum balance.
So most college freshmen and sophomores will be unable to find a lender
willing to consolidate their loans.

Note that exploiting this loophole requires the cooperation of the
current holder of the student's loans. Lenders are not required to
grant early repayment status. If the current holder of a
student's loans is unwilling to give the loans early repayment status,
the student will not be able to consolidate their loans while still in
school. Most lenders require students to consolidate their loans with
them as a condition of granting early repayment status.